The mantra for many ebookers over the past year or so was “get rid of agency pricing and bring back lower ebook prices based on competition.” These ebookers are ecstatic over the approval of the settlement terms in the Department of Justice’s lawsuit against five of the Agency 6 publishers and Apple by Judge Denise Cote on September 6, 2012.

I think it is way too early to celebrate and I think ebook prices of bestsellers will rise, not become lower.

To set the mood to say goodbye to $9.99, here is a song from the past — Don McLean singing his Bye Bye Miss American Pie:

Now that you’ve been entertained, let’s discuss why I think we can say goodbye to the $9.99 bestseller and to real price competition among the big publishing houses which control the majority of popular publishing today.

The first problem lies within the settlement agreement itself. As Judge Cote wrote (p. 10 of the Opinion & Order filed September 6, 2012), the publishers, although they cannot use agency pricing, which presumably means a return to the wholesale pricing of the preagency days, can “enter into contracts that prevent the retailer from selling a Settling Defendant’s e-books at a cumulative loss over the course of one year.” This is a threefold problem for consumers.

First, it means that publishers will be able to require Amazon (and/or Barnes & Noble and/or Apple and/or all other ebooksellers) to disclose both sales numbers and pricing, something that Amazon has been loathe to disclose even to its shareholders. Under the current system of no such requirement, a publisher knows how many of a title have been sold by Amazon because Amazon has to pay for each title sold. But what has not been known, and what every analyst wants to know, is whether the sales are profitable, not just how many units are sold. Analysts want to know whether Amazon has sold 1 million ebooks and made or lost $5 million from the ebook sales alone. And knowing that information, analysts can determine whether or not Kindle hardware sales are profitable — all information that Amazon has steadfastly refused to isolate.

This is problematic because if Amazon has to verify that over the entire line of, say, Macmillan ebooks it is making a profit — and note that it is over the entire Macmillan line, not over the combined lines of Macmillan and Simon & Schuster — Amazon will have to be very cautious about pricing. One cannot easily take a loss on a million-selling ebook in hopes that over the course of the next months it will sell enough ebooks from that publisher to end the year in profit. How likely is it that Amazon will take that gamble and reinstitute $9.99 pricing?

The second reason this is problematic for consumers is because the order essentially orders a return to the wholesale pricing scheme but sets no boundaries on that scheme. There is nothing to prevent the publishers from altering the discount rate or even giving a different discount rate to different ebooksellers. As part of its order, the court did away with the most-favored-nation clause, which said whatever terms you give X you must give me.

I know the response to this is that the publishers need Amazon more than Amazon needs the publishers. I think, however, that Amazon’s caving in to Macmillan when Macmillan demanded agency pricing demonstrates that it is the publishers who are in the catbird’s seat, not Amazon. Amazon is the seller of product and thus needs product to survive. Each of the Big 6 publishers controls a significant portion of the necessary product that Amazon cannot afford to do without. Besides, I expect that each of the publishers will come, independently, to the position of squeezing Amazon similarly, so Amazon will have little recourse, just as it had little recourse in the Macmillan dispute.

The third problem for consumers is that the answer to the worries of the publishers that brought about agency pricing is simply raising the list price of newly published books. The way publishers do this is to take an expected blockbuster and raise its price to the new price point and watch sales. If expected sales (or close thereto) occur, then the next expected blockbuster is given the same price point, and this is repeated until there is confidence that consumers are now expecting to pay the price point.

And this is already beginning. J.K. Rowling’s new book, The Casual Vacancy, a Little, Brown, imprint, has a new price point for a novel: $35. If you check Amazon and Barnes & Noble, you will find that the ebook price at both is $17.99 — a far cry from the previous bestseller price point of $9.99 at Amazon. And the $17.99 is a 49% discount off the list price, which means that the ebook is likely to be generating a 1% gross profit for the retailers, just barely meeting the condition in the settlement order. I see this as an indication that the ebooksellers are concerned about profitability over the entire Little, Brown ebook line over the coming year.

Under the agency system, it would have been expected that Rowling’s new ebook would carry a price no higher than $14.99.

There is also the question of whether Amazon has gotten used to actually making money on ebooks and is using the profit to subsidize the Kindle hardware. Nate Hoffelder raised this question in Did the Agency Model Lead to Cheap eReaders? at his The Digital Reader blog. Having made money on ebooks over the past year, how likely is it that Amazon will want to subsidize both the hardware and the content, perhaps taking a loss on both? At some point, Amazon has to show a profit to prevent shareholder rebellion. And now it has the perfect excuse to do so: Judge Cote’s approval of the settlement agreement that allows publishers to require Amazon to earn a profit on ebooks.

It is the combination of forces that have been unleashed by the approved settlement agreement that will result in no agency pricing for at least 2 years but, instead, higher prices for consumers and the end of the $9.99 bestseller price. We may occasionally see a bestseller being offered at the $9.99 price, but it will be the occasional bestseller, not all bestsellers as in the past. And if we watch prices, I think we will see list prices climb; it will be the rare bestseller that will have a list price below $30. Rowling is leading the way and if her book is a bestseller at $35, it won’t take long for other top-tier writers to insist on equal list pricing. That is how it happened in the past and how it will happen this time.

I may be wrong, but I doubt it. History does tend to repeat itself and the DOJ and Judge Cote have let loose a rising tide. Do you agree?

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7 Comments

I added JKRowling’s ebook to my Amazon wishlist, but only to check for price drops. I will not support this insane price point and will certainly not spend $18 for the ebook, nor $35 for ANY novel. She will end up missing sales, unless her book gets so hyped up that people turn into sheep and help it become a best seller.

Unfortunately, this is an inaccurate assessment of the settlement. The settlement includes an acknowledgment that there is one type of agency contract that could exist and that is one wherein the overall discounts do not exceed the overall commissions a retailer receives. It does not require any retailer to agree to these conditions. Further, there is no requirement for a retailer to provide sales data other than it already provides in order to fulfill any contractual duty that may arise out of a contract that contains price reduction protection.

It seems likely that digital list prices will increase; however, there is nothing to prevent a retailer from discounting to $9.99 even off a $35 list price if a) the retailer believes that pricing is likely to attract customers and b) can fulfill the contractual obligations it has with a publisher.

The premise of your argument seems to rest a great deal on this idea of a mandated price protection scheme. There is no mandate or requirement. It was just an allowed form of price protection that both retailers and publishers could negotiate and the details of which are simply not known.

Jane, I disagree. One cannot assume that Judge Cote included language in her order that she knows is unenforceable and she did include the language that allows a publisher to require a retailer to be profitable over the whole of the publisher’s line. This will be very difficult for a retailer to do if the retailer loses money on the vast majority of ebooks it sells.

Quite frankly, I think this is an example of a very poorly constructed settlement agreement and judicial order. Back in the days when I practiced law, such an order would not have been approved, at least not by the judges I practiced before.

Actually she never included that language. Further, she did not modify the settlement agreement in any way. Cote wrote

“As discussed above, this provision permits the Settling Defendants to enter into contracts with e-book retailers that prevent the retailer from selling a Settling Defendant’s e-books at a cumulative loss over the course of one year.”

PERMITS, not requires.

She goes on to state

“The Government notes that it included this section in the proposed Final Judgment at the behest of the Settling Defendants, who were concerned about Amazon’s discounting practices. The provision is entirely voluntary. Accordingly, if any Settling Defendant wishes to take advantage of the provision it can do so by negotiating the requisite contractual terms with e-books retailers, including provisions for monitoring and enforcement. As such, this section provides no reason to deny entry of the decree.”

I don’t get the impression, from the news coverage I’ve seen, that Amazon cares about profits in the short-term. I think they care about capturing market share and driving volume, and if they take losses on the Kindle or on some high-profile titles, that’s okay. What they might do if they achieve complete dominance in the ebook market is another question, but since I lack a crystal ball that can see the future, I won’t speculate. I know why publishers don’t want to let Amazon price ebooks cheaply. It will kill their sales in other channels. As for whether $9.99 or $12.99 or $14.99 or $35.00 is too expensive … well, if people will pay that price, then it isn’t. If they won’t, then it is. Every company wants to charge as much as they can for what they sell. If their price is too high, they’ll find out real quick.